REGIONALIZATION
Regionalization is a form of restructuring. Restructuring can be a tool that systems use to maintain long-term capacity. Regional economic integration means agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services and factors of production between each other. Agreements designed are believed to produce gains from trade for all member countries. Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade Agreement (NAFTA) or part of a regional organization (such as the European Union). Depending on the level of economic integration, trade blocs can fall into different categories, such as free trade areas, customs unions, common markets, economic and political unions.
In a free trade area, barriers to trade between members’ countries are removed, but each country determines its own external trade policy. Centralizing production in those locations within the area where the mix of factors costs and skills is optimal being practice. In a custom union, internal barriers to trade are removed and a common external trade policy is adopted. A common market is similar to a customs union, except that a common market also allows factors of production to move freely between countries. An economic union involves even closer integration, including the establishment of common currency and the harmonization of tax rates. A political union is the logical culmination of attempts to achieve even closer integration.
EU formally removed many barriers to doing business across border within the EU in attempt to create a single market. The member states of EU have launched a single currency, the euro, which will reduce exchange cost and currency fluctuation risk, and they are moving closer political union. Canada, Mexico and the United States have implemented the NAFTA. Even though the implementation of NAFTA have resulted job losses in some sectors of the American economy, the benefit of greater regional trade are argued to outweigh any cost.
The move towards regional economic integration is generally seen as a good thing but it also will lead to a world in which regional trade blocs compete against each other. In this possible future scenario, free trade will exist within each bloc, but each bloc will compete its market from outside competition with high tariff. The specter of the EU and NAFTA turning into economic fortresses that shut out foreign producers with high tariff barriers is worrisome to those who believe in unrestricted free trade. If such a situation were to materialize, the resulting decline in trade between blocs could more than offset the gains from free trade within blocs.